Zero-Fighter Maker Hastens Energy Push With Joint Alstom Bid

A bid by Siemens, Mitsubishi Heavy and Hitachi may increase pressure on General Electric Co. to improve its existing $17 billion offer for Alstom’s energy assets. Photographer: Chris Ratcliffe/Bloomberg

June 17 (Bloomberg) -- Mitsubishi Heavy Industries Ltd.’s
joint bid for Alstom SA’s energy business signals its intention
to join the top table of equipment makers for power generation.

Building gas turbines and pumps for thermal, nuclear and
geothermal power plants already delivers more than one-third of
revenues at Mitsubishi, the one-time maker of the Japanese
navy’s Zero fighter plane. Moreover, it’s the Tokyo-based
company’s biggest contributor to operating profit.

A successful bid for Alstom as part of the Siemens AG-led
group that also includes Hitachi Ltd. wouldn’t only trump a
rival offer by General Electric Co. but also has the potential
to catapult Mitsubishi Heavy into the same league as GE in terms
of power generation systems.

“Power is the most important business segment for
Mitsubishi Heavy,” said Yoku Ihara, president of Growth&Value
Stock Research. “They’re betting that they won’t be able to
compete unless they can join top-class players. If GE buys
Alstom, Mitsubishi Heavy will be no match for the enlarged
company. GE would be by far the top in the industry.”

For Mitsubishi Heavy, which traces its origins to 1884 and
the shipyards of Nagasaki, a successful bid would hasten its
push to derive half its revenue from energy.

Sense of Urgency

Mitsubishi Heavy’s bid “reflects the sense of urgency that
GE’s purchase of Alstom would allow it to hold an overwhelming
position in the global gas-turbine markets,” Masanori Wakae, an
analyst at Mizuho Securities Co., said ahead of the deal’s
formal announcement.

Mitsubishi Heavy executives find themselves at the
forefront of Japan’s effort to parlay technical know-how into
greater international exposure. Prime Minister Shinzo Abe, for
example, has used visits abroad to tout Japan’s expertise in
nuclear technology.

Abe and French President Francois Hollande agreed last
month that Japan would join a French research effort to develop
a so-called fourth generation fast-breeder reactor. Mitsubishi
and French reactor developer Areva SA signed a $22 billion
agreement in May 2013 to build a nuclear power plant in Turkey.

Mitsubishi Heavy targets a doubling in operating profit at
its energy and environment business by March 2019, the company
said in a June 10 presentation. Overall, sales are expected to
reach 4 trillion yen ($39 billion) by March 2015.

Energy Segment Sales

Sales at the energy and environment segment surged 20
percent last fiscal year alone, according to the company’s most
recent earnings statement.

“So far, the size of our business has been too small to
compete globally, but we will grow a bit bigger,” Atsushi
Maekawa, senior executive vice president in charge of energy and
environment at Mitsubishi Heavy, said on June 10, one day before
the company said it’s considering the joint bid.

Siemens is offering 3.9 billion euros ($5.3 billion) for
Alstom’s gas turbines, while Mitsubishi Heavy and Hitachi would
pay 3.1 billion euros for stakes in the steam-turbine, power-grid and hydro businesses. Mitsubishi also offered to buy as
much as 10 percent of Alstom, a stake valued at about 900
million euros, while Siemens will explore combining its rail
assets with Alstom’s.

Siemens says the combined value of its proposals tops GE’s
bid by about 1 billion euros as it includes more assets.

To support their case, Siemens Chief Executive Officer Joe
Kaeser and Mitsubishi Heavy Chief Executive Officer Shunichi
Miyanaga are scheduled to speak at the economics affairs
committee of France’s National Assembly today.

Selling the Bid

“The point is whether they can present the content of
their bid as an attractive scheme that would lead to overall
growth in terms of employment and technological advancement”
and not merely on the size of the offer, said Minoru Matsuno,
president of Value Search Asset Management Co. in Tokyo.

Mitsubishi Heavy’s shares were down 11 yen, or 1.8 percent,
at 619 yen as of 12:52 p.m. in Tokyo trading today after earlier
falling as much as 2.2 percent. The Nikkei 225 Stock Average
rose as much as 0.6 percent.

The deal comes at a time of strength for Mitsubishi Heavy.
The company posted net income of 160.4 billion yen in the fiscal
year ended March 31, its highest since at least 1992. The
company has also been paying down debt.

Mitsubishi Heavy had total debt outstanding of 957.5
billion yen as of March 31, 41 percent lower than the 1.62
trillion yen of debt at the end of fiscal 2009, according to
data compiled by Bloomberg.

Equipment Supplier

“MHI’s core power systems division, which yields a third
of its consolidated sales, generates high, steady profit and
cash flow,” ratings company Standard & Poor’s said in a note in
April. S&P rates Mitsubishi Heavy BBB+ with a stable outlook.

Mitsubishi Heavy supplies some of the turbines used by
Iceland to tap that nation’s underground sources of renewable
energy. The company is also expanding into other renewables. In
September, Mitsubishi Heavy agreed to form a venture with Vestas
Wind Systems A/S to develop offshore wind power plants.

Mitsubishi Heavy and Siemens in May announced they had
reached agreement to form a joint venture in steel and metal
production. Mitsubishi-Hitachi Metals Machinery Inc., a company
majority-owned by Mitsubishi Heavy, will form the venture with
Siemens’s metals technologies division in January 2015.

“Originally, it hasn’t been an aggressive company,” said
Mizuho Securities’ Wakae said. “I have a positive outlook on
the company’s dynamic reform.”